A month after finalising historic “zoom” debt restructurings, Argentina and Ecuador find themselves on starkly different paths toward economic and financial improvements. Understanding how broad similarities have evolved into striking contrasts sheds light not only on the countries’ individual circumstances but also the wider issue of reforming the international debt architecture, which the International Monetary Fund and World Bank are, rightly, putting more focus on as they prepare for the future of a global economy shadowed by Covid-19.
While Ecuador’s process was much smoother than Argentina’s, both countries — during severe Covid-related disruptions — agreed with their creditors on significant modifications to their international bonds that eased both interest and principal payment obligations. Previous adoption of collective action clauses (CACs), which severely limit the ability of small dissenting minorities from disrupting restructurings, helped enormously.
The similarities did not end there. Agreement was facilitated by the fact that the two countries, as serial restructurers, had already shared detailed debt data with creditors. In both cases, the IMF played a supporting role. And neither country found much traction for state-contingent bonds, whose theoretical attractiveness — they link additional payments to better-than-expected outcomes — was again frustrated by operational issues. (Full disclosure: I am an adviser to Gramercy, which holds Argentine and Ecuador debt, and also a member of the IMF’s external advisory group.)
Despite the big similarities, two notable differences ended up playing a much bigger role in the restructurings’ aftermath.
First, on the inform-influence-impose spectrum, the IMF’s role in Argentina was limited to providing information of debt sustainability; the one it played in Ecuador went further as the authorities actively sought more fund involvement. As such, Ecuador has transitioned quickly to an IMF programme, helping to better anchor the policy-debt virtuous cycle that many countries have been able to exploit after restructurings. That’s not the case for Argentina, where the IMF interactions are still at an early stage and still appear rather tentative.
Second, the composition of the creditor base was also different for each country. Ecuador’s was overwhelmingly dominated by “dedicated investors” whose natural habitat is emerging markets. Their “resident” status, and the investment behaviour and understanding of the asset class, are much different from the “tourist” status of cross-over investors who are much more prominent in Argentina. With that comes less creditor cohesion, which has added to the pressure on, and subsequent underperformance, of Argentine bonds after restructuring. That leaves a sour taste in the mouths of potential providers of new capital.
The implications for the broader debate on the reform of the international debt architecture become clear when considering the good, bad and ugly of these two historic restructurings.
First, the good: The traditional country-based approach – voluntary, market-based and with broadly comparable treatment among securities — held up under difficult Covid-19 conditions. It is also good that the CACs operated well. As for the bad: the lack of traction for state-contingent instruments, the time and resources devoted to the restructurings and the fact that this approach is not scalable for most creditors in a world that could be full of debt problems. The ugly is that problems with coordination and cohesion among private creditors, amplified significantly by cross-over dynamics, accentuate the already complex issues of comparability and sequencing between private and official government creditors.
The implications for reforms to the international debt architecture fall into two analytically distinct approaches.
The IMF and World Bank should continue to push for changes that make the voluntary market-based approach more agile — from more operational state-contingent instruments and greater data transparency and reliability to earlier comprehensive IMF involvement and better incorporation of environmental, social and corporate governance considerations. At the same time, they should consider how best to make legal resolution mechanisms more practical, allow for carve-outs for tail shocks and better link obligations to payment capacity. Such work would prove particularly important if the recent sharp rise in deficits and debt in emerging economies is not matched by significantly stronger economic growth — a risk that is material and growing given the weakening of growth models that still rely heavily on continued globalisation, high commodity prices and the relatively smooth cross-border flows of goods, services, tourists, foreign direct investments and, in some cases, migrant workers.
by Mohamed A. El-Erian, Bloomberg